Is This The Worst Piece Of Mortgage Advice Ever Given?

For many first-time home buyers, especially people looking to buy in an area where home prices are higher than average, the biggest roadblock can be saving up to make that down-payment. While there are some tried-and-true methods for amassing that cash — a “gift” from your parents is the classic example — here’s one from a mortgage broker we would never, under any circumstances, suggest you try.

buyers can borrow the down payment through a line of credit, personal loan or possibly cash advances against a credit card.

Even with the caveat that the buyer would have to be able to afford to service the mortgage debt, pay property taxes and heating costs plus an additional payment on the borrowed funds,” this has to be among the most ludicrous suggestions we’ve ever heard.

Now, we’re not Canadian, but unless our neighbors to the north are somehow paying single-digit interest rates on cash advances — and a peek at sites like Creditcards.ca shows they are not — this person is actually suggesting you take out what is effectively a high-interest loan so that you can qualify for a low-interest home loan?

Writes Consumerist reader Kara, who tipped us to the badvice:

A cash advance against a credit card? at 21-29%? Interest kicking off as soon as you take it out? I honestly don’t know if there’s any sort of professional accreditation/ethical organization for mortgage brokers or not, but if there is, they need to have a chat with this gal. If there’s not, clearly there ought to be.

Speaking from my own experience as someone who recently bought his first home — and who had to answer for every penny deposited in the accounts used to make the down payment — I find it hard to believe that most underwriters would give the green light to a mortgage applicant who needed a credit card cash advance to make up a sizable chunk of their down-payment.

And even if you could manage to get the mortgage, you shouldn’t be saddling yourself with more debt before you’ve even gone to closing.

I worked in IT for a mortgage company back in 2006 and this was a common practice, and I wouldn’t be surprised if it still was. It’s called an 80/20 loan. You take out a lower interest 2nd loan or LOC for the 20% down so you don’t have to pay PMI, since paying PMI is completely throwing money away.It was really meant for people with decent income (but without enough savings) to get a mortgage without having to pay PMI.
My personal opinion is that if you can’t save up the down payment you either can’t afford the home or aren’t responsible enough to own a home yet.

Sorry, technically its called a piggyback loan, and 80/20 is one of the options. There’s different options depending on if you are putting any money down at all like 80/15/5 where you put down 5% and borrow 15% etc.

“My personal opinion is that if you can’t save up the down payment you either can’t afford the home or aren’t responsible enough to own a home yet.”

Perfect summary. The whole sub-prime mess was largely due to people who were too irresponsible with their finances to qualify for conventional loans with sensible terms, and there were too many shenanigans in which they’d put nearly no money down, putting them in a position to be well underwater if anything happened to the housing market. Whether too much home or too little fiscal responsibility, not having an appropriate amount to put down is just begging for trouble.

Eh, there are exceptions to everything. We bought when our little apartment went condo (DC area, very high housing costs). We weren’t planning to buy and didn’t put a dime down. But otherwise we would have paid several hundred more per month to rent in the area close to work (and this includes the $350+ monthly HOA fee.)

We got a great rate for buying our own apartment, we paid the maximum extra on the second mortgage each month until it was gone, our credit ratings are high. I’d say we were responsible and this little 1BR condo is certainly not more house than we could afford. We’re able to save now. I know several other people who wound up similarly benefiting from not having to save a down payment. Most are also in areas with expensive housing but one is in a rural area.

I appreciate we were lucky in that nobody here got very sick or laid off, but a blanket rule about saving 20% down payment in an area where average-sized, plain condos cost well over $300K? It’s tough.

That’s just it, housing prices in certain areas are way over inflated. If people were required to put 20% down, housing prices would have to come down to reasonable level because nobody could afford to buy it and the housing wouldn’t sell. Something is only worth what people can pay.
This entire system of “no or little” down payment was invented because of rising housing prices that makes 20% a huge down payment. And it back fired on them when housing prices collapsed.

True, I remember back in 2002 my Citicard was sending me checks I can draw against my credit card balance, at a rate of 1.9% for the life of the balance and with a transfer fee capped at $50…. Up to my available balance, which was $15k. I would have used it for a down payment but back then I was in the market for purchasing a home.

Wow, well played. 1.99% fixed for life is a damn good deal. Kuddos to you for taking advantage of a good program when it existed. What is this loan called? I may look into it and see if my bank has it.

When I bought my first home back in 1980 and I got approved for the mortgage from Citibank I also got a $5000 Ready Credit account (line of credit accessed by checks) to go along with it. Thought it was the most ridiculous thing but a few years later I did use that money to buy a car because the interest rate was fixed at 12% and due to high inflation the auto loan would have been 24%.

Thank you for explaining this, but I still don’t think it’s that simple. The 5% cash back reward on your cash back does, in about 9 out of 10 cases, have interest attached to it automatically. Yes, that means that even if you pay it off by the end of the month, etc, you are getting at least 10, probably closer to 20%, interest attached, every damn month, and having new interest accrued onto the total of the old balance + last months interest that has been rolled into the balance. This means there is no reward, because you automatically created 2-4x the amount of your ‘cash back bonus’ simply by taking instant cash over and over.

Moreover, I am * extremely* skeptical that your government is essentially giving out a tax credit that will increase proportionally with credit card debt, so as to ensure that you can rack up as much debt as you want, up to 10k, and have it all paid off a the end of the year? That is not economically sound.

In any case though, thank you for also being nicer in explaning this than your American counterparts would have been. (Usually, posts like this would have already devolved into the ‘I’m going to abc your xyz you blah blah blah”…’merica. $*%# yeah :/ )

In Canada, you can’t write off the interest on you mortgage, credit cards, etc. From my understanding you can in the US.

The BC Home Owner Grant also only provides a reduction in property taxes, not a tax refund.

So I’m not following where the money is coming from to pay off the cash advancement and debt servicing fees associated with it. I only see that you now how a large mortgage, an additional high interest loan, and additional burden of fees like property taxes, utilities, and strata (Condo/Town house) fees.

Turns out I didn’t know about the new 2012 First Time New Home Buyer’s Bonus in BC. You can get 5% of the purchase price (Up to 10k) but it needs to be a newly built or substantially renovated (Over 90%) home.

The provincial government‚Äôs new bonus for first-time buyers of new homes, which is a one-time refundable personal tax credit equal to five per cent of the purchase price of a home to a maximum of $10,000, can also be used to help with a down payment.

It’s people like you, easily hoodwinked because you don’t know the business, and too lazy to research it, who are the victims of lousy advice. Check your credit card for the interest rate on a cash advance. You think it’s 5% and you are horribly wrong.

Let’s say the house costs $250,000 and I don’t have the down payment of 20%, which is $50,000, do you really think I have a credit card with the type of cash advance limit that would let me take advantage of this dubious advice?

Not only does this not work, but most lenders require “seasoning” on down payments, essentially proof that you’ve had the money for a while or that is was a gift from family or a charity (the only allowable outside sources). If you just put the money in the bank they will want proof (pay stubs, lottery forms, w/e) from where the money came from.

Oh, that’s nothing, I can do worse: “buyers can borrow the down payment on your rental property through a line of credit, personal loan or possibly cash advances against a credit card.”

Now I plan to make a six CD and fourteen workbook “How to Make Millions in Toronto Real Estate with No Money Down in Your Part Time!” lesson plan and sell it by infomercial. Carleton Sheets, move over – Cor’s comin’ to town!

Yupe, I had a friend who did that despite having everyone urging her not to do it. I’m not sure how her boyfriend talked her into it or how she actually agreed to do it, but she did. (And that happened right after her paying her 401K back when she had to take a loan out to help her move across the country.)

My mortgage broker actually brought it up a few times. He asked for my 401k statement during the approval process and I told him he could have it but that the money was off the table. He still brought it up a couple of times after that, and I told him it was not up for discussion. Somewhat related: he’s not my mortgage broker anymore.

Huh. Interesting. Last year, Wells Fargo didn’t care one whit about what was in our 403-bs or 401-ks unless we were going to be borrowing from those accounts to make our down payment. We weren’t, so we didn’t need to provide any of that as evidence of assets or fiscal stability.

In fact, I had previously borrowed from my 403-b and was in the process of paying it back when we applied for our mortgage, and our agent said, essentially, that because I had just borrowed my own money, that “loan” had nothing to do with either my credit rating or our suitability for a mortgage.

She took out a 401(k) loan to move? Was she transferring locations at the same job? I thought you had to pay back a 401(k) loan when you left an employer.

I am actually trying to explain to my boyfriend right now why I cannot get a mortgage. He doesn’t believe me that they care about debt payment to income ratio that much (I am at 35% already with student debt, car, etc).

His mortgage is a VA loan, and he didn’t have to have a down payment or pay PMI, so I think his view of things is a little distorted.

And why is this a bad thing to do? A 401k withdrawal I can understand, but a loan where you pay yourself back plus interest? I don’t understand why you can say that is absolutely the wrong thing to do, especially if that puts you at 20% and you no longer have to pay pmi, don’t have to put taxes in escrow, etc.

Typically, 401k contributions are done with before tax dollars, but your re-payment is with after tax dollars. When you later take a distribution from your 401k, you pay the taxes; any repayment for a loan that was already taxed will be taxed again (both principal & loan interest).

Also, if something happens and you quit/fired before the loan is paid back it is due immediately or you must pay the tax penalty – I was told it was 45% of the amount not paid back.

And the interest you pay on this type of loan is not interest that can be deducted on your taxes.

The one on the post-tax dollars is a misnomer. If I am making a loan from my 401k I am getting x amount in real dollars, now I have to pay back x amount with post tax (real) dollars, I don’t see what the problem is. The loan is not an early distribution so there would be no penalty associated with it.

As with anything there is some risk: if you get fired or quit before it is payed off you need to either pay it back within a certain time frame (30-60 days typically) or pay the withdrawal penalty and it counts as income for your taxes that year (ouch!).

Yes it is costing some money, both in the fact that I getting less post-tax dollars in my pocket and am losing out on the earnings of the money while it is in the loan. On the other fact, I am paying myself back interest and the 4.25% interest is better than some investments that it could be in. Also keep in mind my other points, if it puts you at 20% you could be saving yourself over $5k in pmi. My point is blanket statements like the previous one don’t take into account every possibility.

One statement that I will make is: Don’t take a 401k withdrawal for a down payment. There are all sorts of negatives associated with that choice (and few upsides from my point of view).

I don’t know all the details to her loan, but from what she told me, she had to pay it back and she does have to pay interests. I never took a loan out from my tiny 401K, so I don’t know how it really works. But without going into all the details, a really big problem is that her boyfriend has big problems with money management and saw her 401K as a second bank rather than HER retirement fund.

Another problem is that they didn’t even have 1% saved up for the 20% down, they took the entire 20% out from the 401K. It just all screamed bad money management.

You do pay interest, but that interest goes back into your 401k. It might not be so bad if the return on the funds do so poorly that your interest percentage is higher, but then if that’s the case, you probably are in the wrong funds or are in very safe conservative ones close to retirement.

Ah welcome to Vancouver. Where real estate will always go up and prices never come down.

If you don’t get in now, you will be priced out forever. After all, this is the best place on earth‚Ñ¢ (I know, the license plates here tell me so) and EVERYBODY wants to live here. Plus, they don’t make any more land!

Yeah, when I was getting a mortgage in Nov 2010 I had to document every deposit over $1,000 within the past 6 months.

HOWEVER… a friend of mine took a 14% APR $8000 loan in 2009 to buy his home, it was granted by a bank (not the mortgaging bank) as a “signature loan” with the understanding that it would be paid back with the First Time Home Buyers tax credit. I have no idea of the specifics, but there is an example of someone borrowing in order to come up with a down payment (or at least borrowing to give the impression of shored up savings).

There must be some balancing act… The bank is OK with you having some debt. They also want you to have cash on hand. So there must be some gray area were borrowing money makes sense because it makes you look like you have cash, but still keeps you under the radar in terms of debt.

Unless you already had an amazing line of credit and very low debt to income ratio, this would be likely to not get you the mortgage – or, if you do it after a pre-approval, kill any chances you had of closing, since one thing that they often look for before approval to close is sudden jumps in new line of OR use of credit.

Well, as recently as 2008 I could get low fixed interest “convenience checks” at 3%, with a 3% service fee. Right around then when the whole economy started looking really bad, they changed to low introductory rates, reverting to the regular purchase APR after the intro period. I had enough of a credit limit where I could hypothetically put 20% down on something like a condo, but not a house. If it lowered my interest rates or payments on the mortgage enough (no mortgage insurance, that sort of thing), I could see it having been a good way to go back then, but I don’t expect low fixed rates to be offered now.

Gee, I’m surprised they didn’t suggest borrowing 5% from the local loan shark and then parley that into 20% or more with the local bookie (who may be the same person! One stop shopping, talk about a win!).

Um, if you can’t manage to save a down payment, then you shouldn’t be buying a house. Saving a down payment shows:

1. You can save money, which is important in life, especially if you own a house, which comes with tons of unexpected expenses that you need to save for. It shows that you can delay gratification and be financially responsible.

2. Gives you a vested financial interest in the house so you are less likely to default.

People just need to bite the bullet and save and stop being foolish with money. That gotta have it now attitude is foolish and irresponsible.

My husband and I went to our Bank of America branch to ask for lower interest rates or possibly a new card with a balance transfer to help us get out of debt. We currently live in the home of my father in law rent-free.

The banker told us we ought to BUY A HOUSE and in a few years get an equity loan to pay down out debt. Yes, their solution for getting out of 10k in credit card debt was to take on a mortgage payment.

I believe that Canada now has its own versions of Countrywide. Recently I read an article bragging about one (of 2700) agent doing 60 million in mortgages. The guy looked like he was in his early 20s. It reeked of a company that saw sending any mortgage out the door as good business. Seeing that this company (like Countrywide) is not a major bank, where were they getting their money? Mortgage backed securities maybe?

In my 27+ years of mortgage banking I’ve never seen a loan with that source of downpayment be approved. In rare circumstances when a borrower qualifies with the extra payments for the borrowed funds, the loan must be against a secured asset. NEVER a line of credit.

BMO Readiline (line of credit) currently has rates from 3.1% to 6.29% but that’s secured.

Canadian lenders cannot lend over 80% of the assessed value of a house by a third party assessor. You can borrow the last 15% of the down payment from a bank with insurance issued by either CMHC or a third-party. For this privilege you pay up to 7% of the value of the house and the bank is insured from loss. The table is at http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

What he is talking about is the last 5%. In this case, all payments that you are making, including available credit limit are considered as owing in the calculations of your ability to repay the mortgage. If I remember correctly, the maximum is 30% of your net. Every cost is considered including condo fees, city taxes and all loans or credit card limits. Not the smartest move to actually borrow the last 5%, but not unheard of. But the loan is definitely counted against you and would cost you more for the CMHC fees.

As a retired real estate broker, I concur in labeling this perhaps the most ignorant, damaging home ownership advice ever given. I’m also a retired newsman, and I know it’s tough to staff a newspaper today with competent special talent. But there’s no excuse under the Vancouver Sun for a newspaper to foist advice that incompetent on its readers after seeing this.

Thats crazy – I’m in Alberta (the province directly east of BC), and when we purchased our place in 2010, we had to prove we DIDN’T borrow our down payment. A good portion of it was from shares from a previous employer that we cashed in – we needed to fax in copies of everything to show it wasn’t a loan from our parents or something. I wouldn’t be surprised if any bank up here declined you in finding out where the downpayment came from….

Oops, we actually did this. I panicked at the possible amount of closing costs and took out a loan against my 401K. I am now paying it back verrrrry sloooooowwwwly…..and the kicker is, we probably didn’t even need it. Our bank rep drastically overestimated our closing costs.

Wasn’t it advice like this that set off the whole bad mortgage crisis? Did they ever stop doing it? Of course, the only ones who suffered from that were the buyers, who started out upside down and then lost to foreclosures.

A former coworker did just this very thing. She overpaid on a huge house she could not afford and borrowed the down payment at 29% interest. At the time I had a real estate license and offered to help her find a house within her means. She figured she knew better and ending up losing the house within 2 years. She’s back living with her parents saddled with huge debts from this deal.

First time home buyer, save up for your downpayment, don’t rush into anything. Keep in mind, to own a home, your true cost of ownership…… take your monthy mortgage payment, and add 30% to cover utilities, insurance, maintanance and repairs. 30% pretty much covers all the other stuff besides the mortgate payment. This is a good realistic amount to know if you can afford it, on top of your daily living expenses of food/clothing/gas etc.

PS: you need to put that 30% aside, pay the utilities/maint/repairs, and anything left, save in a seperate account for a future major/unexpected repair; so when it happens, and odd are it will, you will have the money set aside already.
I even have another separate savings account (direct deposit), I put $100 a week into it. I call it my ‘stupid stuff” account. So when the TV, Fridge, washer/driver breaks down etc, I’ve got money aside for it, and don’t have to worry about coming up with the funds, or using a dreaded credit card. When I think of all the years gone by, how much money a threw away on credit card interest, it’s sickening.

Not sure where they got this information from, but CMHC won’t give insurance approval (which is required by reasonable banks that don’t want to loose a couple hundred grand to an uninsured mortgage) unless you can prove that your down payment came from non-credit sources. So…yeah, totally out to lunch.

“Um, if you can’t manage to save a down payment, then you shouldn’t be buying a house. Saving a down payment shows:”

That is not entirely true. In some markets, the price of renting can actually be higher then the cost of owning – which is going to make it very difficult to save up money towards a downpayment, but doesnt mean that someone can not pay a mortgage and build savings once they are in a place.

I see it happen in my area, where there are plenty of rental properties that are second homes/income only properties that are rented out to college students who are used to living in more expensive areas – and the landlords rent the apts out so they can pay both mortgages. We only saved some money towards a house because our apt was insanely below market rate. When we moved out, they raised the rent by almost 350, and its still a good deal.

While I think this advice is terrible, PMI is becoming a big pain nowadays, so I can understand why people try to avoid being snared by it.

A friend of mine who just bought a house informed me that he is paying around $400 per month for PMI. Also, it seems that reaching 20% of the house value is no longer sufficient to eliminate PMI once you have PMI. PMI companies are now requiring people to continue paying PMI for a set period of time even if you reach 20% through either payments or through appreciation of the house value.